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Monday, 28 November 2011

The Economy solved... do I have your attention? Good.

At current the economy is a, shall we say, confusing entity. Like the facts surrounding the middle-east conflict, there seems to be just as much misinformation as there is truth and because of this, whenever we hear the words "economy", "fiscal" or "monetary",whilst we may not understand what is being said, but we can be reasonably certain that its not good. 

So allow me to simplify the issue with a very brief history of the economic crisis, leaving out all of the hype and ridiculous words such as "fiscal" which means "money", or "monetary" which means... "money"! or "quantative easing" which, though it sounds like it should have something to do with making an obese man's trousers slightly bigger round the waist, simply means printing money.

Basically what happened was that we (and by we I mean bankers) borrowed lots and lots of money at a certain interest rate price (this we will call "loan 1"). This price is paid annually yearly until the borrowed money is returned. What the banks then did was invest lend this borrowed money to businesses and individuals at an even higher interest price (this we will call "loan 2") and in so doing, reaping the profits money left over after paying the first, lower price. Now this sounds like a very clever scheme, and it would have been had they not become over zealous with there lending. Not only were banks lending to other banks (which they assumed were doing all the necessary checks to insure that they could pay back the loans which they were taking out and so often neglected to do the necessary checks themselves, which in and of itself is not that bad because everyone assumes that the one thing banks know how to handle is there own monetary affairs money... or at least back then they did) but they were also lending more and more recklessly to more and more high risk ventures people who may have not been able to pay the money back.

It is often at this point in the explanation that bankers say that it was the borrowers fault for borrowing more than they could pay back. This is not true, if you are loaning out other peoples money then it is your responsibility to ensure that the people whom you loan the money too are reputable and have the income ability to pay it back plus the interest on top price. It is double your responsibility if loaning lending money is your JOB and you are paid to do it!

So then the inevitable happened and people could not pay back the loans ("loan 2") so now banks were accumulating adding on month by month and year by year, the yearly interest price which they had to pay on their loans ("loan 1") which they took out to fund them lending out money in the first place (I know this is a bit confusing but basically the banks are now getting in debt). A lot of these loans ("loan 2") were being secured against properties (if they couldn't pay back the money the back would take the persons home as payment) however because prices of houses were so high, people were not buying them so banks had to keep reducing and reducing the price of the houses which they were selling meaning that they were not getting back the amount of money they were expecting (banks now getting into even more debt). Moreover, the lowering of the house prices at market level meant that house prices in general started to decline and as such the mortgages on them money borrowed to buy them became more than these houses became worth (these "mortgages worth more than the houses" are referred to as "sub-prime mortgages"). 

To compound the issue even further, bundles of these "sub-prime mortgages" were being sold (yes that's right, they were selling debts, as in "if you buy this off me, then they will owe you the money which they owe me") in a shop called "wall street" (its a shop where you can buy and sell industry specific banking and investment products and ventures stuff that is so detached from reality that it is questionable whether or not it even exists) under the new title "structured Investment Vehicle" (SIV) and these SIV's were being bought and sold as if they were an independent entity from the debt which they are made up of (brings to mind an image of playing pass the parcel with a bomb). Whoever ended up with a SIV which they couldn't sell on, when looking inside it to try and claim the debt money owed, often discovered that it was in fact a lot less money than what they had paid to buy it in the first place. Moreover, the people who owe the money often couldn't pay it back and repossessing selling the house it was secured against would be pointless as the house is worth less than the money owed (are you still following? basically the banks are really really in debt now!)

Now, the question is raised, who do the banks owe? And the answer is us! Its our money which we are putting in current accounts and savings accounts which is being loaned out and gambled on by the bankers. As such, it isn't directly them who are accumulating building up debt, but the company which is the bank. If the bank invests lends poorly, it isn't the bankers who lose their money, but us whose money they have been playing with. It is this knowledge which led the banks the turn to the Government to ask them to pay off the banks debts ("loan 1") on the basis that it would harm the general economy because millions of people would lose lots of money (neglecting the fact that it was entirely the bankers fault that millions of people would lose lots of money, and in so doing ensuring no negative repercussions for the bankers). The Government agreed and used tax money to pay off the banks debts (which basically means we paid money to the Government, to pay money to the banks, to save our money... confused? you should be.). Now this would have been Ok had the Government had enough money to do this... but it didn't, in fact the Government were one of the organisations which had been borrowing money off of the banks in the first place! 

This massive climate of debt triggered what is referred to as a "recession" which is basically when people stop spending. This meant that people were not buying products so companies were not making projected profits so there share value was declining on wall street which meant value of the company was declining which mean wages and jobs were being cut which meant people had less money so they stopped spending which meant products weren't being bought... and round and round it went. To end this vicious cycle, the government injected billions of pounds into the economy, which it of course didn't have and so had to borrow, which increased its debt even more. 

This recession was not limited to the UK but was a Global recession which affected Europe and US just as much. This is because banks were borrowing and lending internationally meaning that bail-outs (governments saving banks) were being made Globally not just in the UK and all government were borrowing and thus getting in debt.

Because of the annual price put on this debt, for every year that it goes unpaid, its cost increases. In the UK this has got to a point where we now owe 2.2 trillion pounds, which is nearly 5% of all the money that there is in the world! 

So how do we solve this horrible situation? The answer is actually very very simple. First you pay bankers by commission with a five year deferred gratification period. If the investment's which they make prove profitable, then after five years (whereby sustained profitability can be determined) they get paid a percentage of the profit of the investment. This means less risk for our money and more incentive for bankers to make cautious and yet profitable decisions with our money. We also need to put in place regulation which states that any investment losses are shared equally amongst the investor (us) and the investing banker (the bankers) this way they are held accountable, in an appropriate manor, for the decisions they make.

secondly, to pay off this massive debt build up we need to do one very simple thing which we should have done a long long long time ago...


The cannabis trade in the UK is currently estimated to be worth £85 a week for over 3 million people, thats £255 million a week and £13.26 billion a year! current policing of cannabis costs £50 million a year meaning we could save £13.31 billion a year if we just stopped saying cannabis was illegal and started growing it here instead of farms abroad. More over it would destroy the drug cartels and dealer networks which is estimated to save the police a further £2 billion a year! The regulation of the drug would also meant less dangers to the users and an estimated saving to the NHS of a further £500 million a year! That's a total saving of £15.81 billion! or in other words, £15.81 billion is how much it costs to keep cannabis illegal! 

Thirdly, you bring every troop home! Every single troop that is stationed in Iraq, Afghanistan, Korea, it doesn't matter you bring them back. We can't afford war on a moral or an economic basis. If people choose to attack us then we retaliate but until then why aggravate foreign sovereignties? We can leave america to do that!

These are just two of the very simple things that can be done to help the UK out of this financial crisis. They are not radical, nor are they new ideas... in fact they are very old ideas which have been mentioned countless times by numerous people. I am not radical, nor am I trying to be radical by advocating them. I also advocate having a maximum wage per employee so that if you own a company which employ's only ten people, then you as the owner/CEO can only earn so much until you employ more people. This way it is ensured that where money is being made it is also being distributed in a fair manor. This is not so much socialism as responsible social capitalism.

Remember, the more people earning, the more people spending.

Mr Magic

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